Japan - Economy

Japan's economy is the most advanced in Asia and the second most
technologically advanced in the world, behind the United States. Total
GDP in nominal terms in 2001, at $4.147 trillion, was also second only
to the United States, but in purchasing power parity (PPP) terms, given
the high price level in Japan and the low price level in China,
Japan's estimated GDP of $3.45 trillion (PPP), according to the
US Central Intelligence Agency (CIA), put it third behind the United
States and China. In per capita GDP, measured in purchasing power parity
terms, Japan was fifth among the major nations of the world: $27,200
(PPP) put it behind only the United States, Switzerland, Denmark, and
Ireland according to the CIA estimates. Japan was the first Asian
country to develop a large urban middle-class industrial society. It was
also the first Asian country where a sharp reduction in birthrate set
the stage for notable further increases in per capita income.

Since 1952, the number of farmers has fallen sharply, while expansion
has been concentrated in industry and trade. The agriculture sector in
2001 accounted for only 2% of the GDP, although it remains somewhat
subsidized, employing a relatively high 5% of the labor force. Domestic
raw materials are far too limited to provide for the nation's
needs, and imports must be relied on for such basics as many raw cotton,
raw wool, bauxite, and crude rubber, with fuels and foodstuffs heading
the list materials. The primary engine of Japan's modern growth
has been the need to pay for these basic imports with manufactured
exports. The exchange of high value-added finished products for low
value-added commodities and raw materials has been the basis for both
its high level of industrialization and its persistently high trade
surpluses. Up until the mid-1980s, economic development depended on
continued expansion in exports. With the steady appreciation of the yen
in real terms since 1985, however, the country's economic
structure has undergone some adjustment. Business investment became the
second major engine of growth. Facilitated by growing wage rates,
favorable credit conditions, cuts in personal and corporate income tax
rates and other stimulative measures by the government, domestic demand
as well as direct foreign investment have played an increasingly
important role as a source of growth in recent years.

During the late 1980s, a 70% appreciation of the yen's value
against the US dollar helped narrow Japan's trade surplus by 19%
for two consecutive years in 1988/89 and 1989/90. This was accompanied
by low rates of unemployment as well as strong growth in consumer
spending and private investment, in turn contributing to a healthy 5%
annual growth rate in the GNP between 1987 and 1990. The end of the
period of lowered growth, 1975 to 1990, coincided with the collapse of
the Cold War confrontation. The period that has followed, 1991 to 2003,
has been characterized by very low to stagnant growth, and three dips
into recession. The investment boom of the late 1980s, known
retrospectively as the bubble economy, had its corresponding bust 1991
to 1994, leaving mountains of debts that still constitute a major drag
on the economy because the government continues to hesitate to implement
the major restructuring reforms urgently urged on it by outside
observers to clear up credit lines for new investment and new forms of
business organization. GDP growth rates fell to 1.0%, .3%, .6%, and 1.5%
in the period 1992 to 1995. A spurt of recovery to 5% in 1996 was cut
short by the Asian financial crisis, and Japan saw its first recession
year since 1974 when GDP declined 1% in 1998.

Recovery from the Asian financial crisis was itself cut short in 2001,
with the onset of a global slowdown and the aftershocks of the 11
September 2001 terrorist attacks on the United States: real GDP growth,
according to IMF estimates, dropped from 2.2% in 2000 to -0.5% in 2001.
Whether 2002 will be a third recessional since the collapse of the
bubble economy remains to be seen. Strong growth in the first quarters
of 2002 driven by strong exports were followed by signs of weakening
towards the end, as the yen began to strengthen against the dollar, and
unemployment reached a new high of 5.4%. The depth of recessions have
been minimalized by massive stimulus packages and tax cuts across the
period of stagnant growth. Recently, major tax cuts have been made in
1999 and 2003, and in 2001, the government implemented its ninth massive
stimulus package since 1992, this one for ¥11 trillion (about
$960 billion). The annual budget deficit has been above 7% of GDP since
1999, and is forecast at7.3% of GDP for 2002. Total national debt, at
146% of GDP, is proportionately the highest among developed countries.

The weakness of the banking sector has become an increasingly acute
issue as the stock market, the other major avenue of business
capitalization, has virtually collapsed in the context of the
2001–2002 global retrenchment in stock market prices, losing
about 80% of its value since 1992. Accompanying corporate scandals and
spectacular bankruptcies have done nothing to convince the cautious
Japanese that they should forsake their conservative practices like the
postal savings programs for riskier stock investments. The Japanese
propensity to save has traditionally been high, even before World War
II, when it was measured at 12.5% in 1925. Since the World War II, the
propensity to consume, the obverse of the propensity to save, has
steadily decreased as the economy moved from recovery to high growth to
low growth to stagnation: from 95% in 1947 to an estimated 74% in 2001.
High savings are matched by high individual indebtedness, due mainly to
long term mortgage loans.

The relatively young Prime Minister Koizumi seemed to promise more
radical economic reform, but whatever his intentions, the reversals in
the global economy in 2001 and 2002 have constrained him to more of the
"muddling through" that has characterized Japanese
economic policy for the past decade. After a period of recovery
following World War II (from 1947 to 1960), Japan entered into about 15
years of rapid growth (1961 to 1975) that was arrested by the world oil
crisis, signaled by the first oil shock in 1973. In 1974, for the first
time since World War II, the GNP fell (by 1.8%). The recession was
cushioned, however, by the nation's ability to improve its trade
balance (by $11 billion) by increasing exports while reducing imports.
The recovery of the mid-1970s was slowed by the second oil shock, in
1978–79, and although the Japanese economy continued to
outperform those of most other industrial countries, growth in GNP
slowed to an estimated 4.1% yearly in real terms for 1979– 82,
compared with 8.9% for 1969–72.

Meanwhile, the continued stimulation of exports, especially of
automobiles and video equipment, combined with Japan's
restrictive tariffs and other barriers against imports, led to
increasingly strident criticism of the nation's trade practices
in the United States and Western Europe. As early as 1971, Japan agreed
to limit textile exports to the United States, and in the 1980s it also
imposed limits on exports of steel, automobiles, and television sets.
Similar limits were adopted for exports to Canada, France (where
criticism focused on videocassette recorders), and West Germany.
Nevertheless, Japan's trade surpluses with the US and other
countries continued to swell through the mid-1980s, helped by a number
of factors, most notably the misalignment of major currencies,
particularly between the dollar and the yen.